US Commercial Real Estate Improving?
All of the major commercial real estate sectors in the US are seeing improved fundamentals, but multifamily housing is becoming a landlord’s market commanding bigger rent increases, the latest Commercial Real Estate Market Survey from the National Association of Realtors shows.Reuters reports that one favorable sign driving this expansion is that US banks are stepping up their commercial property lending:
Lawrence Yun, NAR chief economist, said vacancy rates are improving in all of the major commercial real estate sectors. ‘Sustained job creation is benefiting commercial real estate sectors by increasing demand for space,’ he pointed out.
‘Vacancy rates are steadily falling. Leasing is on the rise and rents are showing signs of strengthening, especially in the apartment market where rents are rising the fastest,’ he added.
NAR forecasts commercial vacancy rates over the next year to decline 0.4% in the office sector, 0.8% in industrial real estate, 0.9% in the retail sector and 0.2% in the multifamily rental market.
‘Household formation appears to be rising from pent up demand. The tight apartment market should encourage more apartment construction. Otherwise, rent increases could further accelerate in the near to intermediate term,’ explained Yun.
The Society of Industrial and Office Realtors shows a notable gain in its SIOR Commercial Real Estate Index, an attitudinal survey of 297 local market experts.
The SIOR index, measuring the impact of 10 variables, jumped 8.3% to 63.8 in the fourth quarter of 2011, following a gain of 0.6% in the third quarter.
However, the index remains well below the level of 100 that represents a balanced marketplace, which was last seen in the third quarter of 2007.
Most market indicators posted advances in the fourth quarter, but 71% of respondents said leasing activity is below historic levels in their market, an improvement from 83% in the third quarter. Only 29% report there is ample sublease space available.
Office and industrial space remains a tenant’s market with 87% of participants feeling that tenants are getting a range of benefits ranging from moderate concessions to deep rent discounts.
Construction activity is still low, with 95% of experts reporting it is below normal, and 83% said it is a buyers’ market for development acquisitions. Prices are below construction costs in 78% of markets.
Participants are broadly expecting stronger conditions for the current quarter, with two out of three expecting market improvement.
Vacancy rates in the office sector are projected to fall from 16.4% in the current quarter to 16% in the first quarter of 2013.
The markets with the lowest office vacancy rates presently are Washington, D.C., with a vacancy rate of 9.5%, New York City at 10% and New Orleans at 12.4%.
After rising 1.6% in 2011, office rents should increase another 1.9% this year and 2.4% in 2013. Net absorption of office space in the US, which includes the leasing of new space coming on the market as well as space in existing properties, is forecast at 20.1 million square feet in 2012 and 28.1 million next year.
Industrial vacancy rates are likely to decline from 11.7% in the first quarter of this year to 10.9% in the first quarter of 2013.
The areas with the lowest industrial vacancy rates currently are Orange County, California with a vacancy rate of 4.8%, Los Angeles at 4.9% and Miami at 7.6%.
Annual industrial rent is expected to rise 1.8% in 2012 and 2.3% next year. Net absorption of industrial space nationally is seen at 40.6 million square feet this year and 57.7 million in 2013.
Retail vacancy rates are forecast to decline from 11.9% in the current quarter to 11% in the first quarter of 2013.
Presently, markets with the lowest retail vacancy rates include San Francisco at 3.6%, Fairfield County, Connecticut, at 5.1% and Long Island, New York, at 5.4%.
Average retail rent should rise 0.7% this year and 1.2% in 2013. Net absorption of retail space is projected at 9.9 million square feet this year and 23.9 million in 2013.
The apartment rental market, known as multifamily housing, is likely to see vacancy rates drop from 4.7% in the first quarter to 4.5% in the first quarter of 2013. Multifamily vacancy rates below 5% are generally are considered a landlord’s market with demand justifying higher rents.
Areas with the lowest multifamily vacancy rates currently are New York City at 1.8%, Minneapolis and Portland, Oregon, both at 2.5%, and San Jose, California at 2.7%.
After rising 2.2% last year, average apartment rent is expected to increase 3.8% in 2012 and another 4% next year. Multifamily net absorption is forecast at 209,900 units this year and 223,600 in 2013.
U.S. banks increased lending for commercial real estate and apartment buildings for the first time in nearly two years in the fourth quarter of 2011, another sign of confidence in the improving U.S. economy.
Banks expanded their loans for apartment buildings and commercial real by $5 billion in the fourth quarter, with the bigger, healthier banks leading the way, according to a report released on Wednesday by Chandan Economics, which tracks real estate bank lending. It was the first expansion of commercial real estate loans since the first quarter 2010, the report said.
The report is the result of mining data from the Federal Deposit Insurance Corp, which on Tuesday said bank loan balances overall rose $130.1 billion, or 1.8 percent, in the fourth quarter from the third.
That prompted Martin Gruenberg, acting FDIC chairman, to say the U.S. banking industry's recovery has progressed to the point where the banks are in the position to boost the overall economy by extending more loans.
In yet another sign of economic improvement, the U.S. Commerce Department on Wednesday revised growth of fourth-quarter gross domestic product up to a 3 percent annual rate, from 2.8 percent it reported in January.
Banks are the greatest source of lending for commercial real estate, which depends on large loans to finance the acquisition of properties, such as office buildings, shopping malls and warehouses, and to refinance maturing loans. Soon after the credit crunch hit crisis mode in late 2008, many believed that the commercial real estate sector would follow the bust of the housing sector.
But regulators allowed the banks, which were in no shape to take the hit of large write-downs on defaulted maturing loans, to extend loan maturities. This gave the banks time to shore up their own finances and allowed commercial real estate values to rise from basement levels.
Now the healthier banks have returned to lending. Wells Fargo & Co (WFC.N), Bank of America Corp (BAC.N), U.S. Bankcorp (USB.N) and JPMorgan Chase & Co (JPM.N) had the largest holdings of commercial real estate loans in the fourth quarter of 2011.
"In many ways you could consider us under-invested," Doug Petno, chief executive of JPMorgan Chase's commercial banking business and a member of the company's operating and executive committees, said Tuesday at an investors conference.
JPMorgan Chase, which was number 15 just a year earlier, had the largest holdings of multifamily loans at the end of the quarter, followed by New York Community Bancorp Inc (NYB.N) and Wells Fargo, the report said.
Other banks are still contending with high default rates on existing loans but even those default rates are improving.
The default rate for existing commercial loans fell to 3.76 percent, its lowest level since the third quarter 2009 and the default rate for multifamily loans fell to 2.53 percent, the lowest level since the first quarter 2009, the report said.
Despite the improvement, there remains a long way to go. There was $67.6 billion in distressed commercial real estate and multifamily loans in the domestic banking system as of the fourth quarter. Add construction loans, and that total exceeded more than $100 billion.
Moreover, there is still more than $1 trillion of mortgages maturing over the next several years.
In another favorable development for commercial real estate, CoStar group reports, Insurers Breathe New Life into CRE Lending, Commercial Mortgages:
Much of the growth in commercial real estate around the world is being driven by large pension funds allocating more to this asset class. The Globe and Mail reports that CPPIB will soon be one of the largest institutional owners of regional shopping malls in the United States after striking its biggest real estate investment ever:
Year-end loan numbers for some of the nation's major life insurers show them increasingly willing to jump back into commercial real estate lending. Metlife, Prudential, Standard and American Equity Investment all posted strong increases in originations and/or portfolio build up.
MetLife Inc., through its Real Estate Investments Department, originated more than $11 billion in commercial mortgage loans in 2011, exceeding the more than $8 billion the company originated in 2010, and making it the company's largest commercial mortgage production year ever.
MetLife continues to be the largest portfolio lender in the insurance industry, with $40 billion in commercial mortgage loans outstanding.
Robert Merck, senior managing director and global head of real estate investments for MetLife, said the company strategically navigated through the economic downturn during the past few years and remained an active lender in the market. "Our commitment to prudent risk management and our long-term investment approach has allowed us to take advantage of attractive opportunities in the U.S. and internationally, and we will continue to focus on top quality properties in major markets in 2012," said Merck.
To reach its record commercial mortgage lending volume, MetLife Real Estate Investments completed a number of high-quality real estate transactions with loan sizes of $200 million and above, including: $350 million on 1540 Broadway, an office building in Manhattan; $255 million on 155 North Wacker, an office building in Chicago; $360 million on Park Meadows in Denver and a $325 million loan on International Plaza in Tampa, both super-regional malls.
MetLife also led a renewed effort among major life insurance companies to work together and "club" large, high-quality loans on several properties, including: 601 Lexington Ave. in Manhattan; 555 California in San Francisco; and Natick Mall in Boston.
Mark Wilsmann, managing director and head of MetLife's mortgage lending group, said the firm's ability to originate a number of larger loans on trophy office buildings and regional malls paid off last year. "We were able to originate top quality loans at yields that provided a pick-up of more than 100 basis points over comparable risk corporate bonds, adding long-term value to our investment portfolio," said Wilsmann.
Outside the U.S., MetLife grew its lending activities in 2011, originating more than $600 million in mortgages in Mexico and nearly $800 million in London. MetLife is also an active lender in Japan, with more than 36 billion yen in lending in 2011.
CoStar's London-based finance editor, James Wallace, reported that MetLife, the U.S. insurance company, is emerging as the U.K.'s largest "big ticket" senior debt lender with an appetite to write single real estate loans of up to $318 million this year.
The insurance company closed around $800 million worth of U.K. senior debt deals last year and has so far funded two deals this year, together worth just under $222 million, including its second largest UK deals.
Prudential Mortgage Surpasses 2010 Originations in 2011Prudential Mortgage Capital Co. originated nearly $9.7 billion in commercial mortgages in 2011, surpassing its 2010 originations of $9.1 billion.
Dave Twardock, president of Prudential Mortgage Capital Company, said the company is looking to complete up to $11.6 billion in 2012 and expects financing for multifamily properties to comprise much of that, along with retail centers, industrial properties and some hotels.
His outlook on the U.S. commercial real estate market is optimistic, despite the debate over the U.S. debt ceiling and ongoing European financial crisis. He cautioned, though, that the future remains unpredictable.
"We continued to see compelling opportunities to increase our appetite in commercial mortgages throughout 2011 including our return to CMBS loan originations and our balance sheet program for unstabilized apartments. We are looking to grow our program across portfolio, balance sheet, Agency, FHA, and CMBS originations again in 2012," Twardock said.
The company also announced that its 2011 origination included 26 billion Yen on new loans in Japan. The country will continue to be a focus in 2012, supporting Prudential Financial's growing insurance business there. Prudential Mortgage Capital also plans to expand its lending platform to include the United Kingdom.
These investments are, in large part, a bet on the future health of American consumers. CPPIB now has an interest in 26 malls in major U.S. urban areas, placing it in the top ranks of investors in that area. It has also invested in malls in the U.K., Australia, Brazil and Germany.SL Green Realty Corp. (SLG), New York City’s largest commercial office landlord, recently announced it has sold a 45% joint venture ownership stake in 10 East 53rd Street to CPPIB which made an equity investment of $57.4 million.
The deal will see it make an equity investment of $1.8-billion (U.S.) for a 45-per-cent interest in a new joint venture that it will be forming with Westfield Group.
The joint venture will consist of 10 regional malls and two redevelopment sites, the majority of which are in California.At the moment, the properties are owned and managed by Westfield and have a total gross value of $4.8-billion. The Westfield Group operates one of the world’s biggest shopping centre portfolios, one that is worth tens of billions of dollars and stretches from New Zealand to Brazil.
In Canada, Bloomberg reports that Alberta Investment Management Corporation (AIMCo) may consider bidding for Bank of Nova Scotia’s Scotia Plaza office tower in Toronto.
Benefits Canada reports that Ivanhoe Cambridge, the principal real estate subsidiary of the Caisse de dépôt et placement du Québec, has announced investments in Brazil totalling more than $300 million for the acquisition, expansion and building of shopping centres, as well as the reinforcement of a strategic partnership.
I've already discussed the Caisse, CPPIB still buying Brazil's boom. Interestingly, Property Wire reports that property prices in Brazil are likely to increase modestly, around 5 to 10%, in 2012 and the real estate sector should avoid a bubble, according to a poll of real estate and financial experts. I think it's premature to talk about a Brazilian property 'bubble' -- at least not until we get over the 2014 World Cup.
In any event, the key real estate market to watch for the global recovery is the United States. I noticed that Bank of America (BAC) and JP Morgan (JPM) are among the 5 best-performing Dow stocks in 2012, which is positive for the overall market (go back to read my comment on BAC). And what about the US housing recovery? That too is recovering, albeit at a tepid pace.
Below, Sam Chandan of Chandan Economics speaks with Fox Business Network's Connell McShane regarding home sales data for January. Although the data show a small rise in sales, Chandan explains that investors and distress sales outnumber first-time homebuyers. Difficulties in qualifying for mortgages remain an obstacle for the latter group.
Also embedded an interview with Dennis Virag, president of Automotive Consulting Group Inc., talking about U.S. auto sales in February and the outlook for the industry. General Motors Co. reported a surprise U.S. sales gain while Chrysler Group LLC, Ford Motor Co., and Toyota Motor Corp. also topped analysts’ estimates. Virag speaks with Mark Crumpton on Bloomberg Television's "Bottom Line." Pent-up demand for autos is another positive sign for commercial and residential real estate, indicating the US recovery is taking hold.